Thoughts On Off Shoring and the Implications for Skills

In this article. Dr Dick Evans considers the thorny question of who gains most from off shoring and considers the implications for the UK skill base.

Recent reports have shown that Europe’s share of global off shoring in 2004 exceeded that of America for the first time. Off shoring, as it is increasingly being called, involves a complex set of economic and investment relationships between capital rich/high wage/international brand owning countries (host) and low capital/low wage countries with under deployed workforces (recipient).

This has led to a number of commentators speculating on what the implications could be for the EU and in particular this country. All have accepted that the move of jobs to East Asia is inevitable because of the much lower cost centres particularly labour costs and that this would continue at an ever-accelerating rate in the future. Even accepting this fact various studies have offered very differing views and judgements on the possible implications and relative merits of off shoring for this country’s economy. For example a number have argued that off shoring improves efficiency in the world’s economy and distributes resources in a more realistic fashion by allowing the host countries to capitalise on what they are good at. Further the argument goes that the price of the products and services produced by the recipient country should be cheaper for the ultimate customer and the recipient country undertaking the off shoring activity derives benefits because of increased employment. Interestingly some commentators see these movements of labour eastwards as having a positive impact on the level of employment in this country.

In addition other studies have highlighted off shoring will improve this country’s productivity and as a result increase company profits as a consequence of transferring jobs that are more likely to be low skilled and routine to East East. One such report by the McKinsey consultancy group indicated that for every unit of currency i.e. £ 1 /$ 1 invested in off shoring will produce on average a net profit of 46%. Both partners gain from this payback. The arguments then continue that ideally those companies in the host countries should use their increased profits to create new higher skilled jobs in the home country. Sadly evidence would indicate that this is not happening in this country as is evidenced by other studies and reports.

In an ideal situation the benefits from increased profitability should lead to increased investment in research and development (R&D) and real evidence of ‘moving up the value chain’. This means that as the low skill and routine occupations are moved out there is an opportunity of that country to develop products that possess high value. As has been said before if this country is to increase its share in global markets it must focus on products and services that possess high value and quality. Competitive advantage can only be realised if there are significant levels of R and D and an effective strategy for improving workers’ skills and creating an environment to encourage enterprise. Sadly all these elements are still lacking in this country in spite of government pronouncements to the contrary which proclaim success and improvement. When one talks about improvement it is essential that the relative figures are given and not just the absolute values. It is the figures that compare this country’s performance with other competitors that are important and not simple domestic comparators with the previous year. What is very clear is that this country may be experiencing modest growth in our economy or improvement in the plethora of performance league tables but when compared with other countries we are continuing to lose ground. The Government seem to ignore this critical fact and dangerously broadcasts selective and partial information and as a result reflects a make believe world. The foundations of our economy are fragile and a whole series of critical factors are never discussed e.g. record trade deficit, record personal debt, high exchange rate, low productivity and continuing low levels of skill in the existing and potential work force. This economic fragility will threaten the ability of this country to invest long term in the essential infrastructure that is urgently required in order to address skills shortages and improve our international competitiveness. In order to address many of the weaknesses in this country we need to invest heavily and over a long time in education, training and all aspects of the underpinning infrastructure and this will only be possible if the economy is strong. Whether reflected in league tables on basic education, mathematical/scientific knowledge, higher-level skills and levels of R&D we compare badly with both established and emerging economic nations.

Let’s look at that the background to some of these elements starting with investment in R&D. The spend by British industry is falling for the first time in a decade, (- 1% for 2004). The latest figures from the DTI identified this decrease and equally worrying identified that the country is failing to close the already existing gap with our main competitors in terms of R&D investment. The R&D spend as a proportion of sales was 2.3% within our larger companies, which compares with 4.2% for our international competitors with the US on 4.9%, Germany on 4.3% and Japan on 4.2%. One worrying feature of the figures is the reduction by a number of very large inwardly investing overseas companies of their R&D budgets where traditially these have been some of the highest investors e.g.Ford UK. Also pharmaceutical companies who because of the nature of their business have always had the greatest spend are now cutting back on their R&D budgets. If this trend of reduction continues in the R&D budget it will seriously undermine this countries capability to improve its international performance and reduce its ability to begin to address and close the gap compared with our main competitors. Research has shown that there is a positive correlation between the investment in R&D and company performance, competitiveness, innovation and the ability to add value and quality to its products and services. The emerging economies are committing massive amounts of resource to their education systems as well as developing hi tech industries and not just depending on low skill occupations involved with for example call centres or hospitality.

The state of manufacturing very much mirrors many of the complex issues associated with the changing nature of work and the continuing impact of the operation of the ‘open world economy’. In spite of the inevitability and apparent benefits mentioned above because of the shift of jobs eastwards Britain has fared far worse than other countries. Since the start of the economic downturn at the end of 2000 the UK’s manufacturing performance has been the worst of all the G7 nations. Comparative figures show a decline of 6 % in the UK, 2 % in the euro zone and an increase of 0.5 % in the US. Reflection on these figures raises some fundamental questions about the future of this country as a global player. The euro zone and the US are subject to similar global factors such as off shoring and greater global competition and yet this country performs the worst. It seems yet again as if the country has still not realised the full implication of the massive transitions that are occurring in the world. A similar situation has existed over the centuries, as one only has to look at the Great Exhibition (1851) and the Paris Exhibition (1867) when it became apparent that Germany, France and America were over taking Britain in many industries. Interesting to quote Lyon Playfair who in 1851 (1) gave the following prophetic warning –

As surely as darkness follows the setting of the sun, so surely will England recede as a Manufacturing nation, unless her industrial population become much more conversant with science than they are now’

An amazing quote from an amazing individual!

At the heart of a successful economy is a well-qualified and adaptable work force possessing specialist skills at a high level and also having effective communication, numeracy and IT skills. In addition people entering or intending to enter employment at all levels must possess the necessary attitudes for the work place. The country is dogged by continued low productivity levels some the lowest in the developed world this again weakens our international competiveness. Studies still highlight employers’ concern about the low level of achievement and commitment of the entrants to work. Concern is continually expressed about shortages in the higher levels of vocational skills as well as with capability of key and basic skills. These concerns sit along side the major problems with shortages in mathematics, pure sciences, engineering, and manufacturing. The country performs relatively badly in international league tables in such key subjects as science and mathematics whilst domestic examination results e.g. GCSE exhibit only slight annual improvement in mathematics and science and these again compare badly, in relative terms, with our major competitors.

One of the weaknesses with current government policies is the obsession with low level of achievement e.g. level 2 which although important must not distract attention away from the higher levels. There is already a massive task in tackling basic skills particularly for adults and many leaving school but time is not on our side to take a relaxed view on the higher-level skills. Adequate funding must be made available on a long-term basis to rapidly develop appropriate vocational qualifications at the higher levels and I do not mean the current highly questionable policy of increasing the university population to 50% by 2010 without adequate attention to strategic specialisms. Also the emerging foundation degrees programmes will do little to address the real needs of industry. What is needed is a radical set of policies that focus on what this country requires from its education and training system in order to compete within the global markets. It’s not about tinkering with existing educational qualifications and systems or like Tomlinson who has advocated taking ten years to bring in reforms just for 14-19 stage. Time is at a premium it could be already 5 past midnight! If one analyses the latest DTI figures for manufacturing and extrapolates from the current data British industry may not exist in 20 years (cf Playfair!). So let’s have less of the hype from the government and its supporters and adopt a realistic view of our current problems and limitations and begin to carry out a set of root and branch reforms that recognises and matches what is now required by the global economy.

Reference:

(1) Lyon Playfair, “The study of abstract science essential to the progress of industry”. Lecture at Government School of Mines 1851-52 session. Published as ‘British Eloquence: lectures and addresses’, (London 1855)

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